Virtually no one signs up for a 5-year fixed mortgage with plans to break it early.
Yet, almost half of Canadians who’ve had one previously say they refinanced or terminated a 5-year fixed early, according to a rates.ca survey this spring.
The biggest issue here is that breaking a fixed mortgage early entails penalties, and oftentimes they're substantial.
Take this case of an Oshawa woman who was quoted a $15,000 penalty to break her mortgage early due to a separation.
While most penalties aren’t so high, they routinely run into the thousands of dollars. And if you're breaking your mortgage early to refinance at a lower rate or consolidate debt, sometimes high penalties can wipe out any potential savings.
That's where it's handy to know exactly how big your prepayment charge could be before pulling the trigger.
For that, you'll need a good mortgage penalty calculator, also known as a mortgage prepayment calculator.
Below you'll find calculators that will estimate your penalty at Canada's top lenders. If your lender isn't listed, phone its customer service line to ask them directly if they have an online prepayment charge estimator.
For most variable mortgages, penalties are typically three months' interest. That can mean three months of interest at your actual contract rate or three months of interest at the lender’s prime rate, a meaningful difference.
For fixed rates, they're usually the greater of three months' interest or the interest rate differential (IRD). IRD compensates a lender when the rate it can reinvest your prepaid mortgage money in is lower than the rate you agreed to. Sometimes IRD penalties can be brutally punitive, especially at Canada’s biggest lenders.
Here are examples of each from the FCAC.
A few lenders charge up to 3% of principal, or 6-12 months' interest to break their mortgages early. Or, rather than using normal discounted rates, some use artificially high posted rates (the Big 6 banks, for example) or bond yields in their calculations. These unconventional methods can result in a penalty that's far more than you ever imagined.
It’s always best to fully understand how big your future penalty might be. The odds of paying one may be bigger than you think.
Mortgage prepayment calculations have been convoluted for a few decades now. For the average borrower, lenders might as well write their mortgage contracts in Greek.
Regulators finally tried to do something about it in 2013...sort of. The Financial Consumer Agency of Canada (FCAC) asked all federally regulated lenders to create online penalty calculators, and most of them did.
Sadly, most provincially regulated lenders, such as credit unions, have refused to add them.
Another problem with mortgage penalty calculators is that many require excessive data inputs, which may include the:
While many of these inputs are required for the calculation, some lenders have been known to complicate the process for borrowers with needlessly frustrating questions, forcing them to dig through their cobweb-laden mortgage paperwork.
In any event, if you have to terminate your mortgage early, hopefully the above list of calculators will save you some effort and provide some clarity on what you’ll owe.